Warren Buffet said it best: “Only when the tide goes out do you see who’s been swimming naked.”
In other words, as economic conditions worsen, some companies that may have exposed shareholders to previously undisclosed risks before the downturn will see those risks materialize, and in the face of even greater pressure to meet financial targets they may engage in questionable or even illegal conduct.
Corporate misbehavior can cause significant losses for investors if the eventual disclosure of misconduct causes the company’s share price to drop. Fortunately, asset managers can often limit their funds’ losses by pursuing legal remedies if the company misled its investors and the broader market. And yet, because these contingent claims have no recognizable value on a fund’s balance sheet, it can take years before fund shareholders receive any benefit from the asset manager’s litigation efforts. In fact, valuable legal claims are often left unpursued, despite the potential for promising recoveries.
Given the current market volatility in the wake of COVID-19 and with stocks down nearly 20 percent in the last month, there will likely be an uptick in meritorious securities claims in the next six to 12 months. Legal finance gives asset managers the ability to turn contingent claims into recognizable assets during a time when cash and liquidity are critical. Burford’s team has both the expertise and scale to identify claims, assess their value, monetize claims and fund portfolio commitments to support an assess manager’s systematic approach to litigation recoveries — services other funders and plaintiffs’ firms are simply not equipped to provide.
Asset managers’ top challenges
Prudent asset managers should be mindful of opportunities to recover losses from portfolio companies that misled investors, but spotting these opportunities is not easy and requires sophisticated legal analysis and forensic investigation.
When considering affirmative litigation asset managers must:
- Separate fraud from poor financial results or bad business decisions
- Assess the collectability risk of suing a company in a weakened financial condition
- Consider the potential duration risk and the possibility that fund shareholders will redeem their shares before a case resolves
Even asset managers that can identify meritorious legal recovery opportunities and choose to pursue them face the unpleasant choice between forcing shareholders to bear the unpredictable costs of litigation or giving up a substantial portion of the fund’s recovery to satisfy a law firm’s contingency fee.
Accelerate access to working capital through monetization
Burford helps fund managers identify, evaluate and capitalize on meritorious litigation and hedge their funds’ litigation risk. By monetizing a portion of a claim’s expected settlement value, funds can generate immediately available cash to pay fund expenses, meet shareholder redemptions or purchase additional securities at an attractive valuation, all without increasing leverage or selling fund assets at a loss.
Monetization capital is provided on a non-recourse basis, meaning Burford can only recover its commitment from a successful litigation resolution. Unlike traditional credit instruments, claim monetization does not increase a fund’s leverage or exposure to fluctuating interest rates.
Through monetization, funds can:
- Unlock the value of litigation claims for the immediate benefit of fund shareholders, while transferring litigation risk to Burford
- Use working capital to manage unanticipated fund expenses and redemptions
- Monetize a claim by a fund in liquidation, so shareholders receive some of the claim’s monetary value when the fund’s assets are distributed
When credit markets tighten and capital becomes scarce, tapping a source of cash that is uncorrelated to market conditions can be a powerful portfolio management tool.
Fund multiple cases with portfolio financing
In addition to monetization, funds with multiple claims can also benefit from portfolio financing. Financing a global portfolio of claims spanning diverse jurisdictions reduces the finance provider’s risk of loss and lowers cost of capital.
Under a portfolio arrangement:
- Burford identifies claims based on the asset manager’s predetermined criteria under an umbrella agreement
- The asset manager and fund board retain full discretion to pursue each claim with their counsel of choice or not to pursue the claim at all
- The asset manager commits to using Burford’s financing for all eligible claims their funds pursue, resulting in more favorable pricing than would be available under a single-case financing
- Capital is provided on a non-recourse basis
- The commitment can cover the client’s due diligence costs, litigation fees and expenses and insurance for adverse costs
- Funds may be used to finance defense costs
Recently, Burford worked with a global asset manager on a multi-year, multi-jurisdictional commitment to fund securities claims globally. Before working with Burford, the asset manager had reviewed competing proposals from law firms and funders for each new securities claim—creating both cost and time inefficiencies. In search of a more efficient solution, the fund manager entered into a financing arrangement with Burford, thus enabling it to pursue claims globally under a master agreement with a unitary fee structure.
As the economy continues to suffer and corporate misconduct is more frequently uncovered, asset managers will see an increase in meritorious legal claims they will need to evaluate and consider pursuing. These legal claims are valuable fund assets and with the right legal finance partner, fund managers can maximize claims’ value for the benefit of fund shareholders.
With our current portfolio, cash position and access to permanent capital, Burford is uniquely positioned to address the litigation challenges asset managers face. While all decisions remain with the client, we work with clients and firms to monitor budgets and making sure cases are litigated efficiently as well as effectively with the best counsel available. Our in-house securities litigation underwriting team includes practitioners from the US, Europe, Australia and Asia and former in-house counsel from global financial institutions, ensuring that Burford brings the necessary experience and expertise to every claim on a global level.